Enron. Tyco. Global Crossing. Adelphia
Communications. WorldCom. And on and on. Each day brings
new allegations of accounting irregularities and corporate
abuses at successful mega-companies: the shifting of
operating expenses into capital accounts, reporting
profits when otherwise losses would have been shown,
multimillion dollar loans made to CEOs then forgiven.

The intent of this article is to educate
lawyers about the potential personal civil responsibility
of corporate CEOs, and review theories of liability,
trends and recent developments in the law. Defense counsel
will learn how to decrease their clients’ exposure and
of new developments in the law. Additionally, strategies
for recovery are reviewed for creditors, corporate and
shareholders’ counsel.

Recent illustrations of the point have
included the acts of WorldCom CEO Bernie Ebbers, who
resigned when questions arose about $366 million in
his personal loans from the company. Another instance
occurred where executives at Centennial Technologies,
a Boston-area computer card manufacturer, allegedly
sent fruit baskets to the CEOs’ friends, recording the
shipments as $2 million in revenue.1

The scandal-ridden corporate world has
shocked the economy and caused investors to lose trillions
of dollars in the stock market. Headline news routinely
reports the latest corporate abuses and photos of CEOs
being carted off to jail in handcuffs. Prosecutors seek
lengthy sentences. Congress and the president enact
broad new regulations of corporations and their accountants,
with stiffer penalties, to protect the nation’s retirement
assets.

How are shareholders, corporations and
third parties to be made whole? How can CEOs avoid personal
liability?

The Sarbanes-Oxley Act of 2002In July, President Bush signed into law H.R. 3763,
the Sarbanes-Oxley Act of 2002. This act charges the
Securities and Exchange Commission with enforcement
of regulations designed to redress corporate and accounting
fraud and corruption, ensuring justice for wrongdoers,
and protecting the interest of workers and shareholders.2

In its initial stages, the bill contained
language authorizing private civil actions against executives
who knowingly misled investors.3 This language
was removed from the final bill. As enacted, the Sarbanes-Oxley
Act of 2002 does not authorize private civil actions
against corporate CEOs. It is unclear whether the act
will establish per se violation standards for
private tort actions.

Corporate counsel, however, should note
certain provisions of the act. Under the law, CEOs and
CFOs must, among other things, certify the authenticity
of financial statements, effective Aug. 14, 2002. H.R.
3763, Sec. 302. Further, in the periods when employees
are prevented from buying and selling company stock
in their pensions or 401(k)s, corporate officials are
also banned from any buying or selling. H.R. 3763, Sec.
306. CEOs are highly encouraged to personally sign the
corporation’s federal income tax returns. H.R. 3763,
Sec. 1001.

Statutory Liability: the Reasonably
Prudent Officer and Payroll TaxesAn officer must discharge his duties in good faith,
with the care an ordinarily prudent person in a like
position would exercise under similar circumstances
and in a manner the officer reasonably believes is in
the best interests of the corporation. ORS 60.377(1).
This duty is owed to the corporation and its shareholders.

Officers may be liable for unpaid payroll
taxes. ORS 316.162(3), by definition, imposes the employer’s
fiduciary duty on corporate officers who are responsible
for seeing that the corporation performs its duty to
pay withholding taxes. The statute makes the officers
personally liable if that duty is not performed. Robblee
v. Department of Revenue, 13 Or. Tax 1, 3 (1996).

The Business Judgment Rule
An officer is entitled to rely on information, opinions,
reports or statements, including financial statements
and other financial data, prepared and presented by
an objectively reliable and competent employee, other
officer, attorney or accountant for the corporation.
ORS 60.377(2). This reliance, however, must be in good
faith. Id.

The statutory duties imposed on officers
appear nearly identical to the duties imposed on directors.
Cf. ORS 60.357. The Oregon Code expressly provides
for a director’s liability for unlawful distributions,
but it is silent as to an officer’s corresponding duty.
Cf. ORS 60.367 and ORS 60.371-60.384. This legislative
void aside, the official comments to the Model Business
Corporations Act imply that the standard of conduct
for certain officers may in fact be more stringent
than for directors in similar circumstances.4

An officer’s ability to rely on others
may be more limited, depending upon the circumstances
of the particular case, than the measure and scope of
reliance permitted a director under section 8.30, in
view of the greater obligation the officer may have
to be familiar with the affairs of the corporation.
[Official Comment, Model Business Corp Act Annot § 8.42,
at 8-264 (3d Ed Supp 1998/1999)]

Historically, this stringent standard
is imposed on officers under common law, rather than
by statute.

Common Law Liability to the Corporation
and ShareholdersAn officer of a corporation is a fiduciary. Klinicki
v. Lundgren, 298 Or. 662, 669 (1985) (Courts universally
stress the high standard of fiduciary duty owed by directors
and officers to their corporation.) Equity should subject
corporate fiduciaries not only to the doctrine of unjust
enrichment but to a standard of loyalty that will prevent
conflicts of interest. Manufacturers Trust Co. v.
Becker, 70 S.Ct. 127, 132 (U.S.N.Y.1949).

CEO misconduct and breach of duty to the
corporation may lead to personal liability to the corporation.
Knowledge and acquiescence by an officer of the corporation
in his or another’s dishonest activities in any other
capacity to the detriment of the corporation constitutes,
as a matter of law, a breach of his fiduciary duty.
Interstate Production Credit Ass’n v. Fireman’s Fund
Ins. Co., 944 F.2d 536, 539 (Or. 1991).

Improper transactions may also be deemed
void. Examples include misappropriation of corporate
assets, excessive salary fixing, unapproved loans or
loans not made in the best interest of the corporation,
conflict-of-interest transactions, competing with the
business of the company and improper benefit from corporate
business.

Common Law Liability to CreditorsCEOs may be subject to common law liability for
fraud, whether committed by an agent with the CEOs knowledge
or whether committed personally, regardless of benefit.
Fraud can take many forms, including securing pre-existing
loans to an insolvent corporation to the detriment of
outside creditors (i.e., 'debt financing').

CEOs may be personally liable to corporate
creditors for fraud, even if the CEO incurred no personal
benefit from the scheme. Creditors Protective Ass’n
v. Balcom, 248 Or 38, 45 - 46 (1967) (Held, a director
who actively participates in a fraudulent scheme to
hinder the creditor’s enforcement of his judgment, and,
pursuant to that scheme, withholds amounts due on garnishment
is personally liable for the amount that garnishment
would have realized.) In order to hold the officer of
a corporation personally liable for fraud by an agent
or employee, it is necessary to show that the officer
had knowledge of the fraud, either actual or imputed,
or personally participated in the fraud. Osborne
v. Hay, 284 Or 133, 145-146 (1978).

A corporate officer, adviser or other
agent who induces the corporation to breach a contract
is liable to the other party to the contract for intentional
interference with an economic relation only if benefit
to the corporation played no role in the officer’s action.
Thus, to enjoy immunity, a corporate officer or employee
must be acting within the scope of his employment and
acting with the intent to benefit the corporation. Beck
v. Croft, 73 Or.App. 673 (1985); Welch v. Bancorp
Management Advisors, Inc., 296 Or. 208, 216-217
(1983).

When a corporation is insolvent, or nearly
so, CEOs may not take security interests in corporate
property to secure preexisting debts to the prejudice
of general creditors. Gantenbein v. Bowles, 103
Or 277, 289 - 290 (1922) ('By the great weight
of authority, where a corporation is insolvent or has
reached such condition that its directors or officers
see that they must deal with its assets in the view
of its probable suspension, they cannot use those assets
to prefer themselves as creditors or sureties in respect
to past advances to the prejudice of general creditors.')

A trend in the law is to recognize that
officers of a bankrupt corporation owe a fiduciary duty
to creditors to protect the company’s assets. See
Jewel Recovery L.P. v. Gordon, 196 BR 348, 354 (Bankr
ND Tex 1996). In Geyer v. Ingersoll Publications
Co., 621 A2d 784 (1992), the court held that this
fiduciary duty arises when the company is unable to
pay debts when due or when its liabilities exceed the
market value of its assets: 'Fiduciary duties to
creditors arise when one is able to establish the fact
of insolvency.' Id. at 790.

ConclusionCreditors, shareholders and the corporation have
a variety of remedies at law and in equity to recover
against the personal assets of a wrongdoing CEO. The
prudent CEO, on the other hand, is cautioned to comply
with new federal regulations concerning financial practices
and to carefully consider her exposure when accepting
benefits or exercising preferences unfavorable to creditors,
the corporation or shareholders.

ABOUT THE AUTHOR
Michelle A. Blackwell is a member of the board of directors
of the Federal Bar Association (District of Oregon)
and co-chair of the Lane County Bar Association, Federal
Court Section. She practices federal civil litigation
with Hutchinson, Cox, Coons, DuPriest, Orr & Sherlock,
Eugene.